Intangible Assets

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Chapter 12 Intangible Assets

QUESTIONS
1. What are the two main characteristics of intangible assets?
2. If intangibles are acquired for stock, how is the cost of the intangible determined?
3. Intangibles have either a limited useful life or an indefinite useful life. How should these two different types of intangibles be amortized?
4. Why does the accounting profession make a distinction between internally created intangibles and purchased intangibles?
5. In 2014, Ghostbusters Corp. spent $420,000 for “goodwill” visits by sales personnel to key customers. The purpose of these visits was to build a solid, friendly relationship for the future and to gain insight into the problems and needs of the companies served. How should this expenditure be reported?
6. What are factors to be considered in estimating the useful life of an intangible asset?
7. What should be the pattern of amortization for a limited life intangible?
8. Columbia Sportswear Company acquired a trademark that is helpful in distinguishing one of its new products.
The trademark is renewable every 10 years at minimal cost. All evidence indicates that this trademarked product will generate cash flows for an indefinite period of time.
How should this trademark be amortized?
9. McNabb Company spent $190,000 developing a new process, $45,000 in legal fees to obtain a patent, and $91,000 to market the process that was patented, all in the year 2014.
How should these costs be accounted for in 2014?
10. Izzy Inc. purchased a patent for $350,000 which has an estimated useful life of 10 years. Its pattern of use or consumption cannot be reliably determined. Prepare the entry to record the amortization of the patent in its first year of use.
11. Explain the difference between artistic-related intangible assets and contract-related intangible assets.
12. What is goodwill? What is a bargain purchase?
13. Under what circumstances is it appropriate to record goodwill in the accounts? How should goodwill, properly recorded on the books, be written off in order to conform with generally accepted accounting principles?
14. In examining financial statements, financial analysts often write off goodwill immediately. Comment on this procedure.
15. Braxton Inc. is considering the write-off of a limited-life intangible because of its lack of profitability. Explain to the management of Braxton how to determine whether a write-off is permitted.
16. Last year, Zeno Company recorded an impairment on an intangible asset held for use. Recent appraisals indicate that the asset has increased in value. Should Zeno record this recovery in value?
17. Explain how losses on impaired intangible assets should be reported in income.
18. Simon Company determines that its goodwill is impaired. It finds that its implied goodwill is $360,000 and its recorded goodwill is $400,000. The fair value of its identifiable assets is $1,450,000. What is the amount of goodwill impaired?
19. What is the nature of research and development costs?
20. Research and development activities may include (a) personnel costs, (b) materials and equipment costs, and
(c) indirect costs. What is the recommended accounting treatment for these three types of R&D costs?
21. Which of the following activities should be expensed currently as R&D costs?
(a) Testing in search for or evaluation of product or process alternatives.
(b) Engineering follow-through in an early phase of commercial production.
(c) Legal work in connection with patent applications or litigation, and the sale or licensing of patents.
22. Indicate the proper accounting for the following items.
(a) Organization costs. (c) Operating losses.
(b) Advertising costs.
23. In 2013, Austin Powers Corporation developed a new product that will be marketed in 2014. In connection with the development of this product, the following costs were incurred in 2013: research and development costs $400,000; materials and supplies consumed $60,000; and compensation paid to research consultants $125,000. It is anticipated that these costs will be recovered in 2016.
What is the amount of research and development costs that Austin Powers should record in 2013 as a charge to expense?
24. Recently, a group of university students decided to incorporate for the purposes of selling a process to recycle the waste product from manufacturing cheese. Some of the initial costs involved were legal fees and office expenses incurred in starting the business, state incorporation fees, and stamp taxes. One student wishes to charge these costs against revenue in the current period. Another wishes to defer these costs and amortize them in the future. Which student is correct?
25. An intangible asset with an estimated useful life of 30 years was acquired on January 1, 2004, for $540,000. On January 1, 2014, a review was made of intangible assets and their expected service lives, and it was determined that this asset had an estimated useful life of 30 more years from the date of the review. What is the amount of amortization for this intangible in 2014?
 
 
BRIEF EXERCISES


BE12-1 Celine Dion Corporation purchases a patent from Salmon Company on January 1, 2014, for $54,000.
The patent has a remaining legal life of 16 years. Celine Dion feels the patent will be useful for 10 years.
Prepare Celine Dion’s journal entries to record the purchase of the patent and 2014 amortization.

BE12-2 Use the information provided in BE12-1. Assume that at January 1, 2016, the carrying amount of the patent on Celine Dion’s books is $43,200. In January, Celine Dion spends $24,000 successfully defending a patent suit. Celine Dion still feels the patent will be useful until the end of 2023. Prepare the journal entries to record the $24,000 expenditure and 2016 amortization.

BE12-3 Larry Byrd, Inc., spent $68,000 in attorney fees while developing the trade name of its new product, the Mean Bean Machine. Prepare the journal entries to record the $68,000 expenditure and the first year’s amortization, using an 8-year life.

BE12-4 Gershwin Corporation obtained a franchise from Sonic Hedgehog Inc. for a cash payment of $120,000 on April 1, 2014. The franchise grants Gershwin the right to sell certain products and services for a period of 8 years. Prepare Gershwin’s April 1 journal entry and December 31 adjusting entry.

BE12-5 On September 1, 2014, Winans Corporation acquired Aumont Enterprises for a cash payment of $700,000. At the time of purchase, Aumont’s balance sheet showed assets of $620,000, liabilities of $200,000, and owners’ equity of $420,000. The fair value of Aumont’s assets is estimated to be $800,000. Compute the amount of goodwill acquired by Winans.

BE12-6 Kenoly Corporation owns a patent that has a carrying amount of $300,000. Kenoly expects future net cash flows from this patent to total $210,000. The fair value of the patent is $110,000. Prepare Kenoly’s journal entry, if necessary, to record the loss on impairment.

BE12-7 Waters Corporation purchased Johnson Company 3 years ago and at that time recorded goodwill of $400,000. The Johnson Division’s net assets, including the goodwill, have a carrying amount of $800,000.
The fair value of the division is estimated to be $1,000,000. Prepare Waters’ journal entry, if necessary, to record impairment of the goodwill.

BE12-8 Use the information provided in BE12-7. Assume that the fair value of the division is estimated to be $750,000 and the implied goodwill is $350,000. Prepare Waters’ journal entry, if necessary, to record impairment of the goodwill.

BE12-9 Capriati Corporation commenced operations in early 2014. The corporation incurred $60,000 of costs such as fees to underwriters, legal fees, state fees, and promotional expenditures during its formation.
Prepare journal entries to record the $60,000 expenditure and 2014 amortization, if any.

BE12-10 Treasure Land Corporation incurred the following costs in 2014.
Cost of laboratory research aimed at discovery of new knowledge $120,000
Cost of testing in search for product alternatives 100,000
Cost of engineering activity required to advance the design of a product to the manufacturing stage 210,000 $430,000
Prepare the necessary 2014 journal entry or entries for Treasure Land.

BE12-11 Indicate whether the following items are capitalized or expensed in the current year.
(a) Purchase cost of a patent from a competitor. (c) Organizational costs.
(b) Research and development costs. (d) Costs incurred internally to create goodwill.

BE12-12 Nieland Industries had one patent recorded on its books as of January 1, 2014. This patent had a book value of $288,000 and a remaining useful life of 8 years. During 2014, Nieland incurred research and development costs of $96,000 and brought a patent infringement suit against a competitor. On December 1,
2014, Nieland received the good news that its patent was valid and that its competitor could not use the process Nieland had patented. The company incurred $85,000 to defend this patent. At what amount should patent(s) be reported on the December 31, 2014, balance sheet, assuming monthly amortization of patents?

BE12-13 Sinise Industries acquired two copyrights during 2014. One copyright related to a textbook that was developed internally at a cost of $9,900. This textbook is estimated to have a useful life of 3 years from
September 1, 2014, the date it was published. The second copyright (a history research textbook) was purchased from University Press on December 1, 2014, for $24,000. This textbook has an indefinite useful life.
How should these two copyrights be reported on Sinise’s balance sheet as of December 31, 2014?


EXERCISES

E12-1 (Classification Issues—Intangibles) Presented below is a list of items that could be included in the intangible assets section of the balance sheet.
1. Investment in a subsidiary company.
2. Timberland.
3. Cost of engineering activity required to advance the design of a product to the manufacturing stage.
4. Lease prepayment (6 months’ rent paid in advance).
5. Cost of equipment obtained.
6. Cost of searching for applications of new research findings.
7. Costs incurred in the formation of a corporation.
8. Operating losses incurred in the start-up of a business.
9. Training costs incurred in start-up of new operation.
10. Purchase cost of a franchise.
11. Goodwill generated internally.
12. Cost of testing in search for product alternatives.
13. Goodwill acquired in the purchase of a business.
14. Cost of developing a patent.
15. Cost of purchasing a patent from an inventor.
16. Legal costs incurred in securing a patent.
17. Unrecovered costs of a successful legal suit to protect the patent.
18. Cost of conceptual formulation of possible product alternatives.
19. Cost of purchasing a copyright.
20. Research and development costs.
21. Long-term receivables.
22. Cost of developing a trademark.
23. Cost of purchasing a trademark.
Instructions

(a) Indicate which items on the list above would generally be reported as intangible assets in the balance sheet.
(b) Indicate how, if at all, the items not reportable as intangible assets would be reported in the financial statements.

E12-2 (Classification Issues—Intangibles) Presented below is selected information related to Martin
Burke Inc. at year-end. All these accounts have debit balances.
Cable television franchises Film contract rights
Music copyrights Customer lists
Research and development costs Prepaid expenses
Goodwill Covenants not to compete
Cash Brand names
Discount on notes payable Notes receivable
Accounts receivable Investments in affiliated companies
Property, plant, and equipment Organization costs
Internet domain name Land
Instructions

Identify which items should be classified as an intangible asset. For those items not classified as an intangible asset, indicate where they would be reported in the financial statements.

E12-3 (Classification Issues—Intangible Assets) Joni Hyde Inc. has the following amounts reported in its general ledger at the end of the current year.
Organization costs $24,000
Trademarks 15,000
Discount on bonds payable 35,000
Deposits with advertising agency for ads to promote goodwill of company 10,000
Excess of cost over fair value of net identifi able assets of acquired subsidiary 75,000
Cost of equipment acquired for research and development projects; the equipment has an alternative future use 90,000
Costs of developing a secret formula for a product that is expected to be marketed for at least 20 years 80,000
Instructions

(a) On the basis of the information above, compute the total amount to be reported by Hyde for intangible assets on its balance sheet at year-end.
(b) If an item is not to be included in intangible assets, explain its proper treatment for reporting purposes.

E12-4 (Intangible Amortization) Presented below is selected information for Alatorre Company.
1. Alatorre purchased a patent from Vania Co. for $1,000,000 on January 1, 2012. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2022. During 2014,
Alatorre determined that the economic benefits of the patent would not last longer than 6 years from the date of acquisition. What amount should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2014?
2. Alatorre bought a franchise from Alexander Co. on January 1, 2013, for $400,000. The carrying amount of the franchise on Alexander’s books on January 1, 2013, was $500,000. The franchise agreement had an estimated useful life of 30 years. Because Alatorre must enter a competitive bidding at the end of 2015, it is unlikely that the franchise will be retained beyond 2022. What amount should be amortized for the year ended December 31, 2014?
3. On January 1, 2014, Alatorre incurred organization costs of $275,000. What amount of organization expense should be reported in 2014?
4. Alatorre purchased the license for distribution of a popular consumer product on January 1, 2014, for $150,000. It is expected that this product will generate cash flows for an indefinite period of time.
The license has an initial term of 5 years but by paying a nominal fee, Alatorre can renew the license indefinitely for successive 5-year terms. What amount should be amortized for the year ended
December 31, 2014?
Instructions

Answer the questions asked about each of the factual situations.

E12-5 (Correct Intangible Assets Account) As the recently appointed auditor for William J. Bryan Corporation, you have been asked to examine selected accounts before the 6-month financial statements of June
30, 2014, are prepared. The controller for William J. Bryan Corporation mentions that only one account is kept for intangible assets. The account is shown below.
Intangible Assets Debit Credit Balance
Jan. 4 Research and development costs 940,000 940,000
Jan. 5 Legal costs to obtain patent 75,000 1,015,000
Jan. 31 Payment of 7 months’ rent on property 91,000 1,106,000 leased by Bryan
Feb. 11 Premium on common stock 250,000 856,000
March 31 Unamortized bond discount on bonds 84,000 940,000 due March 31, 2034
April 30 Promotional expenses related to 207,000 1,147,000 start-up of business
June 30 Operating losses for fi rst 6 months 241,000 1,388,000
Instructions

Prepare the entry or entries necessary to correct this account. Assume that the patent has a useful life of
10 years.

E12-6 (Recording and Amortization of Intangibles) Rolanda Marshall Company, organized in 2013, has set up a single account for all intangible assets. The following summary discloses the debit entries that have been recorded during 2014.
1/2/14 Purchased patent (8-year life) $ 350,000
4/1/14 Purchase goodwill (indefi nite life) 360,000
7/1/14 Purchased franchise with 10-year life; expiration date 7/1/24 450,000
8/1/14 Payment of copyright (5-year life) 156,000
9/1/14 Research and development costs 215,000 $1,531,000
Instructions

Prepare the necessary entries to clear the Intangible Assets account and to set up separate accounts for distinct types of intangibles. Make the entries as of December 31, 2014, recording any necessary amortization and reflecting all balances accurately as of that date. (Use straight-line amortization.)

E12-7 (Accounting for Trade Name) In early January 2013, Outkast Corporation applied for a trade name, incurring legal costs of $16,000. In January 2014, Outkast incurred $7,800 of legal fees in a successful defense of its trade name.
Instructions

(a) Compute 2013 amortization, 12/31/13 book value, 2014 amortization, and 12/31/14 book value if the company amortizes the trade name over 10 years.
(b) Compute the 2014 amortization and the 12/31/14 book value, assuming that at the beginning of
2014, Outkast determines that the trade name will provide no future benefits beyond December 31,
2017.
(c) Ignoring the response for part (b), compute the 2015 amortization and the 12/31/15 book value, assuming that at the beginning of 2015, based on new market research, Outkast determines that the fair value of the trade name is $15,000. Estimated total future cash flows from the trade name is $16,000 on January 3, 2015.

E12-8 (Accounting for Organization Costs) Horace Greeley Corporation was organized in 2013 and began operations at the beginning of 2014. The company is involved in interior design consulting services.
The following costs were incurred prior to the start of operations.
Attorney’s fees in connection with organization of the company $15,000
Purchase of drafting and design equipment 10,000
Costs of meetings of incorporators to discuss organizational activities 7,000
State fi ling fees to incorporate 1,000 $33,000
Instructions

(a) Compute the total amount of organization costs incurred by Greeley.
(b) Prepare the journal entry to record organization costs for 2014.

E12-9 (Accounting for Patents, Franchises, and R&D) Jimmy Carter Company has provided information on intangible assets as follows.
A patent was purchased from Gerald Ford Company for $2,000,000 on January 1, 2013. Carter estimated the remaining useful life of the patent to be 10 years. The patent was carried in Ford’s accounting records at a net book value of $2,000,000 when Ford sold it to Carter.
During 2014, a franchise was purchased from Ronald Reagan Company for $480,000. In addition, 5% of revenue from the franchise must be paid to Reagan. Revenue from the franchise for 2014 was $2,500,000.
Carter estimates the useful life of the franchise to be 10 years and takes a full year’s amortization in the year of purchase.
Carter incurred research and development costs in 2014 as follows.
Materials and equipment $142,000
Personnel 189,000
Indirect costs 102,000 $433,000
Carter estimates that these costs will be recouped by December 31, 2017. The materials and equipment purchased have no alternative uses.
On January 1, 2014, because of recent events in the field, Carter estimates that the remaining life of the patent purchased on January 1, 2013, is only 5 years from January 1, 2014.
Instructions

(a) Prepare a schedule showing the intangibles section of Carter’s balance sheet at December 31, 2014.
Show supporting computations in good form.
(b) Prepare a schedule showing the income statement effect (related to expenses) for the year ended
December 31, 2014, as a result of the facts above. Show supporting computations in good form.
(AICPA adapted)

E12-10 (Accounting for Patents) During 2010, George Winston Corporation spent $170,000 in research and development costs. As a result, a new product called the New Age Piano was patented. The patent was obtained on October 1, 2010, and had a legal life of 20 years and a useful life of 10 years. Legal costs of $18,000 related to the patent were incurred as of October 1, 2010.
Instructions
(a) Prepare all journal entries required in 2010 and 2011 as a result of the transactions above.
(b) On June 1, 2012, Winston spent $9,480 to successfully prosecute a patent infringement suit. As a result, the estimate of useful life was extended to 12 years from June 1, 2012. Prepare all journal entries required in 2012 and 2013.
(c) In 2014, Winston determined that a competitor’s product would make the New Age Piano obsolete and the patent worthless by December 31, 2015. Prepare all journal entries required in 2014 and 2015.

E12-11 (Accounting for Patents) Tones Industries has the following patents on its December 31, 2013, balance sheet.
The following events occurred during the year ended December 31, 2014.
1. Research and development costs of $245,700 were incurred during the year.
2. Patent D was purchased on July 1 for $36,480. This patent has a useful life of 9½ years.
3. As a result of reduced demands for certain products protected by Patent B, a possible impairment of Patent B’s value may have occurred at December 31, 2014. The controller for Tones estimates the expected future cash flows from Patent B will be as follows.
The proper discount rate to be used for these flows is 8%. (Assume that the cash flows occur at the end of the year.)
Instructions

(a) Compute the total carrying amount of Tones’ patents on its December 31, 2013, balance sheet.
(b) Compute the total carrying amount of Tones’ patents on its December 31, 2014, balance sheet.

E12-12 (Accounting for Goodwill) Fred Moss, owner of Moss Interiors, is negotiating for the purchase of
Zweifel Galleries. The balance sheet of Zweifel is given in an abbreviated form below.
Moss and Zweifel agree that:
1. Land is undervalued by $30,000.
2. Equipment is overvalued by $5,000.
Zweifel agrees to sell the gallery to Moss for $350,000.
Instructions

Prepare the entry to record the purchase of Zweifel Galleries on Moss’s books.
Patent Item Initial Cost Date Acquired Useful Life at Date Acquired
Patent A $30,600 3/1/10 17 years
Patent B $15,000 7/1/11 10 years
Patent C $14,400 9/1/12 4 years
Year Expected Future Cash Flows
2015 $2,000
2016 2,000
2017 2,000
ZWEIFEL GALLERIES
BALANCE SHEET
AS OF DECEMBER 31, 2014
Assets Liabilities and Stockholders’ Equity
Cash $100,000 Accounts payable $ 50,000
Land 70,000 Notes payable (long-term) 300,000
Buildings (net) 200,000 Total liabilities 350,000
Equipment (net) 175,000 Common stock $200,000
Copyrights (net) 30,000 Retained earnings 25,000 225,000
Total assets $575,000 Total liabilities and stockholders’ equity $575,000

E12-13 (Accounting for Goodwill) On July 1, 2014, Brigham Corporation purchased Young Company by paying $250,000 cash and issuing a $100,000 note payable to Steve Young. At July 1, 2014, the balance sheet of Young Company was as follows.
Cash $ 50,000 Accounts payable $200,000
Accounts receivable 90,000 Stockholders’ equity 235,000
Inventory 100,000 $435,000
Land 40,000
Buildings (net) 75,000
Equipment (net) 70,000
Trademarks 10,000 $435,000
The recorded amounts all approximate current values except for land (fair value of $60,000), inventory (fair value of $125,000), and trademarks (fair value of $15,000).
Instructions

(a) Prepare the July 1 entry for Brigham Corporation to record the purchase.
(b) Prepare the December 31 entry for Brigham Corporation to record amortization of intangibles. The trademark has an estimated useful life of 4 years with a residual value of $3,000.

E12-14 (Copyright Impairment) Presented below is information related to copyrights owned by Walter de la Mare Company at December 31, 2014.
Cost $8,600,000
Carrying amount 4,300,000
Expected future net cash fl ows 4,000,000
Fair value 3,200,000
Assume that Walter de la Mare Company will continue to use this copyright in the future. As of December 31,
2014, the copyright is estimated to have a remaining useful life of 10 years.
Instructions

(a) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2014. The company does not use accumulated amortization accounts.
(b) Prepare the journal entry to record amortization expense for 2015 related to the copyrights.
(c) The fair value of the copyright at December 31, 2015, is $3,400,000. Prepare the journal entry (if any) necessary to record the increase in fair value.

E12-15 (Goodwill Impairment) Presented below is net asset information related to the Carlos Division of
Santana, Inc.
The purpose of the Carlos Division is to develop a nuclear-powered aircraft. If successful, traveling delays associated with refueling could be substantially reduced. Many other benefits would also occur. To date, management has not had much success and is deciding whether a write-down at this time is appropriate.
Management estimated its future net cash flows from the project to be $400 million. Management has also received an offer to purchase the division for $335 million. All identifiable assets’ and liabilities’ book and fair value amounts are the same.
Instructions

(a) Prepare the journal entry (if any) to record the impairment at December 31, 2014.
(b) At December 31, 2015, it is estimated that the division’s fair value increased to $345 million. Prepare the journal entry (if any) to record this increase in fair value.
CARLOS DIVISION
NET ASSETS
AS OF DECEMBER 31, 2014 (IN MILLIONS)
Cash $ 50
Accounts receivable 200
Property, plant, and equipment (net) 2,600
Goodwill 200
Less: Notes payable (2,700)
Net assets $ 350

E12-16 (Accounting for R&D Costs) Leontyne Price Company from time to time embarks on a research program when a special project seems to offer possibilities. In 2013, the company expends $325,000 on a research project, but by the end of 2013 it is impossible to determine whether any benefit will be derived from it.
Instructions

(a) What account should be charged for the $325,000, and how should it be shown in the financial statements?
(b) The project is completed in 2014, and a successful patent is obtained. The R&D costs to complete the project are $110,000. The administrative and legal expenses incurred in obtaining patent number
472-1001-84 in 2014 total $16,000. The patent has an expected useful life of 5 years. Record these costs in journal entry form. Also, record patent amortization (full year) in 2014.
(c) In 2015, the company successfully defends the patent in extended litigation at a cost of $47,200, thereby extending the patent life to December 31, 2022. What is the proper way to account for this cost? Also, record patent amortization (full year) in 2015.
(d) Additional engineering and consulting costs incurred in 2015 required to advance the design of a product to the manufacturing stage total $60,000. These costs enhance the design of the product considerably. Discuss the proper accounting treatment for this cost.

E12-17 (Accounting for R&D Costs) Thomas More Company incurred the following costs during the current year in connection with its research and development activities.
Cost of equipment acquired that will have alternative uses in future R&D projects over the next 5 years
(uses straight-line depreciation) $280,000
Materials consumed in R&D projects 59,000
Consulting fees paid to outsiders for R&D projects 100,000
Personnel costs of persons involved in R&D projects 128,000
Indirect costs reasonably allocable to R&D projects 50,000
Materials purchased for future R&D projects 34,000
Instructions

Compute the amount to be reported as research and development expense by More on its current year income statement. Assume equipment is purchased at the beginning of the year.





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